Amendment moved [this day]: No. 110, in schedule 9, page 135, line 21, at end insert—

'Taxation of structural investments of long-term funds of insurance companies

8 (1) After section 83(2) of the Finance Act 1989 insert—

''(2AA) But subsection (2A) does not require to be taken into account as receipts of a period of account any increase or decrease in value of subsidiary undertakings, nor shall any distribution from a subsidiary undertaking, resident in the United Kingdom, be taken into account in subsection (2A).''.'.—[Mr. Mark Field.]

I remind the Committee that with this we are also taking amendment No. 109, in schedule 9, page 135, line 22, leave out from beginning to end of line 25 on page 136.

As I was saying, before I was so rudely interrupted—

Order. You were interrupted in accordance with the timetable that the Committee agreed; there was nothing rude about it.

Mr. Cook, the rudeness to which I was referring was your health, of course. As I was about to say before the moment of interruption arrived, may I now ask the Economic Secretary to respond to my comments on amendments Nos. 109 and 110?

I would never be rude to you, Mr. Cook; as you said yourself, you are a man of legendary common sense and modesty.

Talk to amendment No. 110, please.

Okay, Mr. Cook.

It is appropriate that amendments Nos. 109 and 110 are grouped, because the hon. Member for Cities of London and Westminster (Mr. Field) asked for that. I will address amendment No. 109 first.

As the hon. Gentleman explained, paragraph 8 adds a new section—section 444ACA—to the Income and Corporation Taxes Act 1988. It is designed to stop avoidance where business is transferred from one life assurance company to another. Paragraph 8 deals with situations in which company A—the company taking on the business—already owns some or all of the shares of company B, the company that transfers the business. In most cases, the transfer will cause the value of the shares in company B to fall. Under current tax rules, company A gets a tax deduction for that fall in value from either current or future profits. However, it is important to remember that that has happened only because company B transferred the business to company A, so the value of the business has now moved to company A. Therefore, company A has not really suffered a loss in value; the loss on the shares in   company B is balanced by an increase in the value of its other assets. If we do not make the proposed change, companies such as company A will, in effect, get tax relief for the cost of acquiring business, and that is not an allowable tax deduction in any other circumstances. New section 444ACA stops that by adding an amount equivalent to the loss of the trading profits of company A for tax purposes. This is not a new idea. There are provisions in the capital gains tax code for denying deductions when that happens, and provisions that stop banks, share dealers—and, indeed, non-life assurance companies—getting relief for such losses. This change brings life assurance companies into line.

The hon. Gentleman suggested that there was scope for double charging. I can assure him that that is not the case. However, I accept that the new section might have the effect of bringing in an immediate increase in tax profits, even though the transfer of business might reduce profits over a period of years. That happens because companies often defer the recognition of gains and losses by valuing their assets at lower than market value for the purpose of calculating their surplus in their regulatory returns. That treatment is normally followed for tax purposes. Where a company adopts that approach, it is impossible to identify any individual gain or loss in a particular year's overall profits. In those circumstances, the only practical approach for the legislation to adopt is to bring in the additional amount at the time of the transfer of business. That may seem a little harsh in some cases, but there is no easy way of identifying which cases or how harsh. Having said that, I will ask Her Majesty's Revenue and Customs officials to discuss further with the industry the possibility of mitigating this effect in some cases. One way of doing that might be to spread the additional profits. I say to the hon. Gentleman that I cannot undertake to do anything under this Bill, but if a workable relieving measure can be found I shall look at the possibility of applying it back to December 2004 if that is reasonable. I am sure that all members of the Committee will agree that that is a benign, perhaps acceptable type of retrospection, which I hope that Opposition Members will not oppose.

The hon. Gentleman queried the use of fair value as the test for deciding the loss, if the company has written down the value of the assets to comply with the Financial Services Authority rules. I see no difference between that case and one in which the subsidiary, company B—if he can remember the example that I cited—was recently acquired for full market value. In both cases, an amount of cash equal to the value of the business of company B would have been received by company A and that represents the extraction of future profits which, but for paragraph 8, would go untapped.

The hon. Gentleman said that the business transfers under paragraph 7 are expensive and are not only carried out for tax avoidance. I agree that most paragraph 7 transfers are done for bona fide commercial reasons. They are used when industry consolidates, they are used for group restructuring and they are used in demutualisations. However, because there is a genuine commercial reason for the transfer, it   does not mean that it cannot be structured in such a way that tax avoidance is a major consequence of the transfer. The fact that the Government have had to legislate repeatedly on such matters in 2003, 2004 and again this year demonstrates that that is a real issue.

Amendment No. 110 would remove from the investment return that is brought into account when computing a life assurance company's profits any part of the amount that relates to what the amendment calls ''subsidiary undertakings''. Now that the hon. Gentleman has explained the amendment, I begin to see why he considers that it would stop the avoidance that paragraph 8 is trying to stop. It would deny relief for losses on the shares of subsidiaries. However, the amendment suffers from a major difficulty. It does not explain how the loss in value of a subsidiary is to be carved out from an indistinguishable whole. That is exactly the problem that we had when drafting paragraph 8 and it is why, as I said, it can have the effect of bringing in profits too early.

The amendment does not just apply in cases when there is a transfer of businesses. It stops losses on subsidiaries in cases when there is no avoidance. That is not all that the amendment would do. It would go further than paragraph 8 in stopping losses. The Opposition have decided to do more and have tried to exempt from tax income and increases in value of subsidiary companies. It is difficult to justify the giving of a general exemption to shares in subsidiary undertakings and not to any other shares. If the shares of subsidiaries are held in the company's long-term insurance fund, there must be a presumption that they are held there because the income and gains from them provide benefits for policyholders. It is right that income, gains and losses are recognised and taxed at the appropriate rate.

It may be that, if a company could show that its subsidiaries were not somehow contributing to the life assurance business, there would be a case for carving them out. I hope that the hon. Gentleman accepts that the amendment makes no attempt to distinguish between subsidiaries that themselves carry on insurance business and those that simply hold a portfolio of investments as a convenient vehicle. I hope that he will agree that no subsidiaries of that latter sort should be given preferential treatment.

There are several other reasons why the amendment is flawed. I accept that that is a strong way in which to describe it, but the amendment would not work. It does not define subsidiary undertaking nor does it explain how the increase or decrease in value is to be carved out from an indistinguishable whole. It also seeks to discriminate in favour of UK-resident subsidiaries. I wonder whether the companies involved are the same companies that would be going to the European Court of Justice to protest about that sort of discrimination and to have it declared unlawful.

Having said that, I understand that issues about subsidiaries generally have been raised constantly in discussions with HMRC officials. I know that they would be happy to continue to discuss the issue in the context of the ongoing discussions on reform and simplification of the life assurance tax code more   generally. I suggest to the industry that it pursues those discussions. On that basis, I ask the hon. Gentleman to consider withdrawing the amendment.

I confess that I am comforted by some of the Economic Secretary's words on amendment No. 109, although I have to say that we Conservative Committee members are slightly cynical, given that the Minister bemoans the fact that the Treasury has had repeatedly to legislate in this area. Might not that suggest that the Government have not listened to representations, from my party and others, that have been made during past Finance Bills?

I accept that this area is complex and that, as the Minister rightly says, there will be an opportunity to consider the issue again if urgent action needs to be taken as a result of the potential difficulties that life assurance companies will face. The nature of the regulation on them, it has to be accepted, is slightly different from that applying to any other company. Although I appreciate that the idea is to link that with the general capital gains tax, the nature of the assurance and life insurance business is such that all too often the importance of maintaining reserves means that the transfer is not normal—whether from A to B, from C to D or whatever other letters may have been in the Minister's examples.

I accept what the Minister said about amendment No. 110. Given how it is couched, our amendment would potentially be open to abuse and go well beyond the subsidiary relationships that we had in mind. I am comforted in part that the Minister will take on board some of the concerns that we raised. With that in mind, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment No. 111, in schedule 9, page 138, line 19, leave out from beginning to end of line 7 on page 140.

How appropriate, Mr. Cook, that we come to a full Nelson—number 111—on the 200th anniversary of the battle of Trafalgar. [Laughter.] Well, we have to find some sort of connection, so let us celebrate this amendment.

I fear that we shall not keep the Committee too long on this amendment. The commercial situation to which amendment No. 111 relates is that life insurance companies are required to prepare detailed regulatory returns for the Financial Services Authority. Tax charges are based on the amounts shown in those returns, rather than on statutory accounts as is the case with other businesses. In paragraph 13 of schedule 9, there are various amendments to the Finance Act 1989, many of which we discussed earlier.

Currently, in apportioning investment return between categories of business for the purpose of computing taxable profits from writing certain categories of insurance business, section 83A provides that the apportionment between those categories must be considered separately in the context of the investment return brought into account in each form 40 revenue account, which is included in the FSA return.  

The apportionment rules that apply are different depending on whether the business recorded in the form 40 includes any with profits business. It is proposed that the rules be changed so that the only form 40s recognised for that purpose are any prepared in respect of with profits business. A notional form 40 will then be deemed to exist, covering the balance of the long-term business and the apportionment rules applied accordingly. That would require that when, for regulatory purposes, a life insurer produces separate form 40s for different non-profit businesses, those should be consolidated into a single form 40 for apportioning the investment return between those different categories of business.

We understand that the proposal has been introduced without sufficient consultation or consideration having been given to its effects. We have been lobbied by the Association of British Insurers, which is concerned that a number of its members may have to pay additional tax this tax year as a result of this change, without having been in any position to mitigate that loss.

The association made the point that, under this system and the anomalies of the bases in tax law by which life assurers attribute investment return to separate classes of insurance policies, in some cases more than 100 per cent. of investment returns will be taxed. That is true, although it was also true beforehand. It is a legitimate point that legislation that materially impacts on a company's taxable profits should, realistically, be enacted prior to the year's commencing, rather than confirmed in its final form more than halfway through the year, and after the date of the first instalment.

I appreciate that some of those issues, particularly those relating to timing, are a function of the fact that there will be a later Finance Act this year. Nevertheless, there is a concern about consultation. Do the Government feel that there has been sufficient consultation? Even if they are satisfied in that regard, do they feel that it would be more sensible to commence the provision in the financial year 2006–07?

Before dealing with the effect of the amendment, I should like to explain what paragraph 13 does. Like paragraph 3 about inherited estates and the sunset clause—the subject of amendments Nos. 105 and 106, which hon. Members may recall debating this morning—paragraph 13 deals with apportionments of life company income and gains. The aspect that we are concerned with is how many separate apportionments have to be made to allocate investment returns to those categories of business, such as pension business, that are taxed on the basis of their operating profits.

Where a company divides its accounts into separate funds or sub-funds, it can, if certain conditions in tax law are met, carry out separate apportionments for each sub-fund, rather than make a single apportionment for the business as a whole. That can make quite a difference to the end result. I have to tell   the hon. Gentleman that, unfortunately, some companies have manipulated their fund structures purely for tax purposes, and others have benefited excessively from fund structures created for other reasons. We are amending the rules to restrict the separate funds that can be the subject of separate apportionments. In essence, there will be a separate apportionment for each with profits sub-fund and one for everything else. That will produce a fairer outcome for all and remove the incentive to create non-profit sub-funds solely for tax purposes.

We expect this change to yield about £30 million a year. I must say that I suspect that the amendment is motivated by the concerns of one company that thinks that the changes will have a far more serious effect on it than the Red Book figures suggest. Of course, it would not be appropriate for me to comment on the affairs of an individual company—indeed, the hon. Gentleman did not do so—but I can say that the Red Book figures are based on the effect of the change compared with what HMRC believes to be the correct interpretation of the previous rule.

Paragraph 13 is vital if we are to stop a few companies getting an advantage as a result of having complex and, in many cases, unnecessary sub-fund structures. I ask the hon. Gentleman to withdraw the amendment on that basis. In response to his legitimate question about whether we have consulted adequately and sufficiently on the issues, I believe that we have. Some think that the measures will seriously disadvantage them, but if, consciously or otherwise, they are behaving in such a way as to avoid their tax responsibilities, it is up to us to put these measures on the statute book as soon as we can. In that context, I ask the hon. Gentleman to withdraw the amendment.

We have had debates on tax planning and avoidance on a number of occasions. We Opposition Members do not want to be seen as the avoider's friend, but it is fundamental that companies should not be expected to manage their tax affairs in such a way as to pay as much tax as possible into the Exchequer's funds. We certainly support legitimate tax planning. We did not think that there was a deliberate sense of trying to avoid taxation.

The notion of having different funds, and the rather complicated area in which life assurance companies need to work, means that such companies are likely to have various different structures in place. There is a concern among Opposition Members that all too often the Treasury assumes that there should be a standard structure, and that if there are different structures in place, that can only point the finger at what it regards as contrived tax planning and therefore tax avoidance. That is somewhat misguided; this is a complicated area. In the same way as we have received representations, specific representations have been made to the Treasury. In so far as particular companies suffer greatly, we will revert to this issue in future years. It is quite clear that these matters come up annually in Finance Bill after Finance Bill. That should be borne in mind. We have had a chance to air these matters publicly, and that has been useful. On that basis, I beg to ask leave to withdraw the amendment.  

Amendment, by leave, withdrawn.

I beg to move amendment No. 112, in schedule 9, page 141, line 22, at end insert—

'(2A) Section 76 of ICTA 1988 is amended as follows—

(2B) In subsection (11) after paragraph (a) insert—

''(aa) receipts of the company chargeable under Case VI of Schedule D by virtue of section 85(1) above,

(ab) income of the company treated as referable to basic life assurance and general annuity business by section 441B(2) of the Taxes Act 1988 (treatment of UK land),

(ac) amounts treated as accruing to the company and charged to tax under Case VI of Schedule D by virtue of section 442A of that Act (taxation of investment return where risk reinsured), and''

(2C) Section 89 of the Finance Act 1989 is amended as follows—

(2D) Replace subsection (1B) with—

''For the purposes of this section the BLAGAB profits of a company for an accounting period are the aggregate of—

(a) income and chargeable gains referable in accordance with section 432A of the Taxes Act 1988 to the company's basic life assurance and general annuity business insert,

(b) receipts of the company chargeable under Case VI of Schedule D by virtue of section 85(1) above,

(c) income of the company treated as referable to basic life assurance and general annuity business by section 441B(2) of the Taxes Act 1988 (treatment of UK land),

(d) amounts treated as accruing to the company and charged to tax under Case VI of Schedule D by virtue of section 442A of that Act (taxation of investment return where risk reinsured). reduced by the aggregate of—

(e) any non-trading deficit on the company's loan relationships,

(f) expenses of management falling to be deducted under section 76 of the Taxes Act 1988, and

(g) charges on income, so far as referable to the company's basic life assurance and general annuity business.''.'.

The amendment looks considerably more tortuous than it is. It follows the rule of thumb that the longest amendment often has the simplest of motives, and that is the case with this one.

The amendment makes logical changes to paragraph 16 to ensure that the changes caused by paragraph 15 filter into all the relevant legislation where there is a need to determine the quantum of profits arising under a computation for basic life assurance and general annuity business, combined with the pension business case computation against the trading profits if the life assurance business were taxed in the same way as any other company.

I will give two examples in relation to that. Section 76 of the Income and Corporation Taxes Act 1988 involves limiting the deduction for management expenses in a life assurance company where the shareholder profits in the company exceed the overall profits. Section 89(1A) of that Act seeks to determine what proportion of taxable profits are taxed as policyholder profits—in other words, at 20 per cent.—or as shareholder profits, where the 30 per cent. rate applies.

The amendment is relatively straightforward. Perhaps the Economic Secretary thinks that it is a belt-and-braces amendment and that the problems that we have foreseen are not as large as we are   making them out to be. I am interested to hear his comments.

I am delighted to say to the hon. Gentleman and to the Opposition that we agree entirely with their objectives on this matter. That is a major revelation on a hot Thursday afternoon. There are flaws in the way that the amendment is worded, but I guarantee that the effect of it will be in the regulations that are issued by HMRC about apportionment. We debated that in relation to amendments Nos. 105 and 106. While I cannot agree to the amendment's wording, its objective will be incorporated in the regulations. On that basis, I ask the hon. Gentleman to withdraw the amendment.

There is no luck in this game is there? That happens on the very last amendment that I am speaking to on this Bill. Perhaps I should take up a few other amendments if I am to have such good fortune in the Economic Secretary's eyes. Given the great assurances that he has made on the amendment, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9 agreed to.